Yams Company reports the following operating results for the month of August: sales $400,000 (units 5,000), variable costs $240,000, and fixed costs $90,000. Management is considering the following independent courses of action to increase net income. 1.Increase selling price by 10% with no change in total variable costs or units sold. 2.Reduce variable costs to 55% of sales. Instructions Compute the net income to be earned under each alternative. Which course of action will produce the higher net income?

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Tundexi Tundexi · Answer 1 · 2020-06-17T02:59:59+02:00

Answer:

The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.

Explanation:

Sales price per unit = (400,000 / 5,000)

Sales price per unit = $80

Sales (5000 x 80) = 400000

Less Variable Cost 240000

Contribution Margin 160000

Less; Fixed Cost 90000

Profit 70,000

Management Consideration 1

When we Increase price by 10%

Increase selling price = 80 + 10/100 * 80

=$68

Sales (5000 x 68) = 440000

Less Variable Cost 240000

Contribution Margin 200000

Less; Fixed Cost 90000

Profit 110,000

Management Consideration 2

When Variable Cost is reduced to 55% of sales

New Variable cost = 80 * 55/100

=$44

Sales (5000 x 68) = 400000

Less Variable Cost (44 * 5000) 220000

Contribution Margin 180000

Less; Fixed Cost 90000

Profit 900,000

Conclusion

The profit is higher when there is increase in sales price by 10% than when the Variable Cost is reduced to 55% of sales.